1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO ___________________
COMMISSION FILE NUMBER 0-26123
ONLINE RESOURCES CORPORATION
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1623052
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(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
7600 COLSHIRE DRIVE, McLEAN, VIRGINIA 22102
------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(703) 394-5100
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----------- -----------
As of May 11, 2001 there were 11,680,377 shares of the issuer's common
stock outstanding.
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ONLINE RESOURCES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page
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Part I. FINANCIAL INFORMATION
Item 1: Financial statements
Balance Sheets at March 31, 2001 and December 31, 2000 1
Statement of Operations for the three months ended March 31, 2001 and 2000 2
Statement of Cash Flows for the three months ended March 31, 2001 and 2000 3
Notes to Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 6
Item 3: Quantitative and Qualitative Disclosures about Market Risk 10
PART II OTHER INFORMATION
Item 1: Legal Proceedings 10
Item 2: Changes in Securities and Use of Proceeds 10
Item 3 and 4: Not Applicable 10
Item 5: Other Information 10
Item 6: Exhibits and Reports on Form 8-K 11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ONLINE RESOURCES CORPORATION
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
------------- ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 3,125,119 $ 1,771,477
Investments 14,164,729 19,688,454
Accounts receivable (net of allowance of approximately $123,000
and $117,000 at March 31, 2001, and December 31, 2000,
respectively) 3,415,623 3,026,010
Deferred implementation costs 824,477 809,901
Prepaid expenses and other current assets 646,252 540,780
------------ ------------
Total current assets 22,176,200 25,836,622
Property and equipment, net 6,687,933 6,524,904
Deferred implementation costs, less current portion 748,276 712,828
Debt issuance costs 1,701,937 1,750,096
Other assets 363,561 303,978
------------ ------------
Total assets $ 31,677,907 $ 35,128,428
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 764,908 $ 858,980
Accrued expenses and other current liabilities 1,624,976 1,309,211
Accrued compensation expenses 667,408 947,136
Deferred revenues 1,069,602 1,103,964
Current portion of capital lease obligations 199,943 278,638
------------ ------------
Total current liabilities 4,326,837 4,497,929
Capital lease obligation, less current maturities 216,328 232,125
Deferred revenues, less current portion 1,011,813 1,193,404
Notes payable 20,000,000 20,000,000
------------ ------------
Total liabilities 25,554,978 25,923,458
Commitments
Series B redeemable convertible preferred stock; 100,000 shares
designated, no shares issued at March 31, 2001 and
December 31, 2000 - -
Series C redeemable convertible preferred stock; 287,000 shares
designated, no shares issued at March 31, 2001 and
December 31, 2000 - -
Stockholders' equity:
Series A convertible preferred stock, $.01 par value; 1,000,000 shares
authorized, non issued at March 31, 2001 and December 31, 2000 - -
Common stock, $.0001 par value; 35,000,000 shares authorized,
11,680,377 and 11,616,649 issued and outstanding at March 31,
2001 and December 31, 2000, respectively 1,168 1,162
Additional paid-in capital 85,464,215 85,238,538
Accumulated deficit (78,844,272) (75,482,307)
Deferred stock compensation (166,579) (185,894)
Receivable from the sale of common stock (422,604) (422,604)
Accumulated other comprehensive income 91,001 56,075
------------ ------------
Total stockholders' equity 6,122,929 9,204,970
------------ ------------
Total liabilities and stockholders' equity $ 31,677,907 $ 35,128,428
============ ============
See accompanying notes to unaudited financial statements.
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ONLINE RESOURCES CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
2001 2000
----------- -----------
Revenues:
Service fees $ 4,929,950 $ 2,316,815
Implementation and other revenues 633,540 682,021
----------- -----------
Total revenues 5,563,490 2,998,836
Costs and expenses:
Service costs 3,211,048 2,698,849
Implementation and other costs 436,731 296,336
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Costs of revenues 3,647,779 2,995,185
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Gross profit 1,915,711 3,651
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General & administrative 1,745,432 1,662,317
Selling and marketing 1,511,153 2,266,814
Systems and development 1,502,342 1,426,953
Non-recurring charges 209,434 -
----------- -----------
Total expenses 4,968,361 5,356,084
----------- -----------
Loss from operations (3,052,650) (5,352,433)
Other (expense) income:
Interest income 204,850 301,004
Interest expense (420,627) (28,700)
Other (93,538) -
----------- -----------
Total other (expense) income (309,315) 272,304
----------- -----------
Loss before cumulative effect of
change in accounting principle (3,361,965) (5,080,129)
Cumulative effect of change in
accounting principle - (216,818)
----------- -----------
Net loss $(3,361,965) $(5,296,947)
=========== ===========
Loss per share:
Loss from operations $ (0.26) $ (0.48)
Before cumulative effect of change in
accounting principle (0.29) (0.46)
Cumulative effect of change in
accounting principle - (0.02)
Net loss $ (0.29) $ (0.48)
Pro forma amounts assuming the accounting change
is applied retroactively:
Net loss $(5,080,129)
Net loss per share $ (0.46)
Shares used in calculation of loss per share:
Basic and diluted 11,646,321 11,135,193
See accompanying notes to unaudited financial statements.
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ONLINE RESOURCES CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
2001 2000
------------ -------------
OPERATING ACTIVITIES
Net loss $ (3,361,965) $ (5,296,947)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 513,008 404,501
Amortization 93,538 -
Compensation expense related to issuance of
common stock 19,315 109,035
Stock compensation 3,704 -
Cumulative effect of change in accounting principle - 216,818
Provision for losses on accounts receivable 5,967 13,000
Realized gain on investments (36,389) -
Amortization of bond discount (20,638) -
Changes in assets and liabilities:
Accounts receivable (395,580) (121,838)
Prepaid expenses and other current assets (105,472) 80,581
Deferred implementation costs (50,024) 147,837
Other assets (59,583) 24,729
Accounts payable (94,072) (236,605)
Accrued expenses 36,037 (11,198)
Deferred revenues (215,953) (147,177)
------------ -------------
Net cash used in operating activities (3,668,107) (4,817,264)
INVESTING ACTIVITIES
Investments in available for sale securities (12,101,879) (13,214,935)
Sale of available for sale securities 17,717,557 18,725,709
Purchases of property and equipment (676,037) (736,971)
------------- -------------
Net cash provided by (used in) investing activities 4,939,641 4,773,803
FINANCING ACTIVITIES
Proceeds from issuance of common stock 221,979 1,143,428
Repayment of stock subscription receivable - 314,636
Repayment of capital lease obligations (94,492) (173,832)
Payment of long-term debt costs (45,379) -
------------- ------------
Net cash provided by financing activities 82,108 1,284,232
------------ ------------
Net increase in cash and cash equivalents 1,353,642 1,240,771
Cash and cash equivalents at beginning of period 1,771,477 1,588,187
------------ ------------
Cash and cash equivalents at end of period $ 3,125,119 $ 2,828,958
============ ============
Supplemental information to statement of cash flows:
Cash paid for interest 10,582 28,700
Unrealized gain/(loss) on investment 91,001 (42,493)
See accompanying notes to unaudited financial statements.
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ONLINE RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Online Resources Corporation (the "Company") is a leading Internet
banking, bill payment and e-finance application service provider to financial
institutions. The Company provides its clients, primarily regional and
community banks, thrifts and credit unions, with an end-to-end outsourced
service, which is branded in the client's name. This enables cost-effective
delivery of Internet-based financial services to consumer, small business and
other retail customers of the Company's clients. By packaging transaction
services with call center, database and support services, the Company offers an
integrated financial hub and a single-source solution for its clients and their
retail customers.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed, or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements include all
adjustments necessary (which are of a normal and recurring nature) for the
fair presentation of the results of the interim periods presented. These
financial statements should be read in conjunction with our audited financial
statements for the year ended December 31, 2000, included in the Annual Report
on Form 10-K filed by the Company with the Securities and Exchange Commission
on March 30, 2001. The results of operations for any interim period are not
necessarily indicative of the results of operations for any other interim
period or for a full fiscal year.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 ("FAS 133"), Accounting for Derivative Instruments and Hedging
Activities, as amended, which is required to be adopted in years beginning
after June 15, 2000. The Company does not invest in financial instruments of a
hedging or derivative nature. FAS 133 will not have a significant effect on
the earnings or the financial position of the Company upon adoption.
RECLASSIFICATION
Certain 2000 amounts have been reclassified to conform to the 2001
presentation.
2. CHANGE IN REVENUE RECOGNITION FOR IMPLEMENTATION REVENUE
The Company generates revenues from service fees, implementation fees, and
other revenues. Revenues from service fees are derived from recurring monthly
fees by providing services which include banking and bill payment, customer
service, consumer marketing, information reporting, and administrative services,
to financial institution clients, typically based on the number of enrolled
retail customers. Implementation and other related revenues are generated from
the linking of the Company's financial institution clients to the Company's
Quotien(TM) e-financial suite through various networks and the Company's
gateways and the sale of PC software and customer service software used to
access the e-financial suite. Effective January 1, 2001, we discontinued support
of our proprietary PC software and screen-based telephone.
The Company previously recognized nonrefundable implementation fees as
revenue under the percentage of completion method as certain milestone output
measures were completed. During the year ended December 31, 2000, the Company
adopted SEC Staff Accounting Bulletin No. 101 -- Revenue Recognition in
Financial Statements ("SAB 101"), effective January 1, 2000, and changed its
method of accounting for nonrefundable implementation fees for all contracts
to recognize such fees and the related incremental direct costs of
implementation activities over the contract term as the services are provided,
which typically range from one to five years (generally three years). The
Company believes the change in accounting principle is preferable based on
guidance provided in SAB 101. The cumulative effect of the accounting change
as of January 1, 2000 was $217,000 ($1,371,000 of revenue less direct
incremental costs of $1,154,000) and was recognized in the statement of
operations for the three months ended March 31, 2000. The effect of the
accounting change on the quarter ended March 31, 2000 was to increase the net
loss before the cumulative effect of the accounting change by $44,000. Due to
the adoption of SAB 101, $1,371,000 of revenue that was previously recognized
under the Company's prior revenue recognition policy will be recognized under
the Company's revised revenue recognition policy through periods up to 2004
because some contract periods extend through 2004. During the quarter ended
March 31, 2001, the Company recognized revenue of approximately $163,000 and
related direct incremental costs that were included in the cumulative effect
adjustment at January 1, 2000.
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3. NON-RECURRING CHARGES
The Company incurred a one-time charge of $209,434, of which $207,648 was
paid, including severance and benefit payments during the quarter ended March
31, 2001 as a result of the staff reduction of 23 employees, approximately 9% of
the total employees, on January 3, 2001.
4. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing the
net loss by the weighted average number of common shares outstanding.
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
----------- -----------
Loss before cumulative effect of change in
accounting principle $(3,361,965) $(5,080,129)
Cumulative effect of change in accounting
principle - (216,818)
----------- -----------
Net loss $(3,361,965) $(5,296,947)
=========== ===========
Weighted average number of common shares 11,646,321 11,135,193
Loss per share:
Basic and diluted $ (0.29) $ (0.48)
=========== ===========
Proforma amounts assuming the accounting
change is applied retroactively:
Net loss $(5,080,129)
===========
Net loss per share $ (0.46)
===========
Due to their antidulitive effects, outstanding shares of stock options,
warrants and convertible subordinated notes to purchase shares of common stock
were excluded from the computation of diluted earnings per share for all
periods presented.
5. EQUITY
During the fiscal quarter ended March 31, 2001, employees purchased
42,343 shares of common stock through employee stock purchase plan and
individuals exercised warrants to purchase 21,385 shares of common stock with
net proceeds to the Company of approximately $222,000.
6. NOTES PAYABLE
On September 28, 2000, the Company completed the private placement of $20
million in convertible subordinated notes (the "Convertible Notes") to a group
of accredited investors. The Company received proceeds of $18.7 million net of
debt issuance costs of $1.3 million including commission of $917,200. The
proceeds have been and will continue to be used for working capital. The
Convertible Notes mature on September 30, 2005, unless previously converted, and
carry an 8% coupon. Interest payment dates are April 1 and October 1, commencing
April 1, 2001. The Convertible Notes are convertible at a price of $4.75 per
share subject to an annual reset under certain circumstances but in no event
will the price be less than $4.00 per share. Subject to certain conditions, the
Company may redeem all or part of the Convertible Notes prior to maturity. As of
March 31, 2001, 4,210,526 shares were authorized and issuable upon conversion of
the Convertible Notes. Jefferies & Company, Inc., one of the underwriters of the
placement, also obtained 200,000 warrants that expire on September 30, 2005 that
are exercisable at the same price as the conversion price under the Convertible
Notes.
As of March 31, 2001, accrued interest on notes payable totaled
approximately $813,000, all of such interest attributable to the Convertible
Notes. As of March 31, 2000, we had no accrued interest on notes payable as no
notes were outstanding.
7. COMPONENTS OF COMPREHENSIVE INCOME
Comprehensive income includes the Company's net loss adjusted for changes,
net of tax, of unrealized losses on investments in marketable securities.
Comprehensive income for the three months ended March 31, 2001 and 2000 is as
follows:
THREE MONTHS ENDED
MARCH 31
2001 2000
---------- ------------
Comprehensive income:
Net loss $(3,361,965) $(5,296,947)
Unrealized gain on investments in
marketable securities 133,494 (42,493)
----------- -----------
Total comprehensive income: $(3,228,471) $(5,339,440)
=========== ===========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY NOTE
This Quarterly Report on Form 10-Q may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, including, but not limited to:
- Any statements in this document that are not statements of historical fact
may be considered forward-looking;
- Forecasts of growth in business-to-business electronic commerce, and
growth in the number of consumers using online banking and billpaying
services;
- Statements regarding trends in our revenues, expense levels, and liquidity
and capital resources;
- Statements about the sufficiency of the proceeds from the sale of securities
and cash balances to meet currently planned working capital and capital
expenditure requirements for at least the next twelve months; and
- Other statements identified or qualified by words such as "likely",
"will", "suggest", "may", "would", "could", "should", "expects",
"anticipates", "estimates", "plans", "projects", "believes", "seek",
"intend" and other similar words that signify forward-looking statements.
These forward-looking statements represent our best judgment as of the
date of the Quarterly Report on Form 10-Q, and we caution readers not to place
undue reliance on such statements. Actual performance and results of operations
may differ materially from those projected or suggested in the forward-looking
statements due to certain risks and uncertainties, including but not limited
to, the risks and uncertainties described or discussed in the section "Risk
Factors" in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 30, 2001. These risks include, among others, the
following:
- our history of losses and anticipation of future losses;
- significant fluctuations of our quarterly financial results;
- our dependence on the marketing efforts of third parties;
- our dependence on our financial institution clients to market our
services;
- the potential uncertainty of our co-marketing efforts;
- the potential fluctuations in our operating results;
- our potential need for additional capital;
- our potential inability to expand our services and related products in the
event of substantial increases in demand for these services and related
products;
- our ability to compete with larger, more established businesses offering
similar products or services;
- our ability to attract and retain skilled personnel due to our complex
business;
- our reliance on our patents and other intellectual property rights;
- our ability to promote our services to be broadly used and accepted by
consumers;
- consolidation of the banking and financial services industry;
- reduction or elimination of the fees for some services due to the consumer
demand for low-cost or free online financial services;
- our failure to successfully implement a system upgrade or conversion may
adversely affect our reputation and our business;
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- our co-marketing efforts may not be successful;
- government regulation could interfere with our business;
- our certificate of incorporation and bylaw provisions may prevent or delay
third parties from buying your stock;
- control of the management and affaires by our management and directors;
- our volatile stock price;
- a substantial number of shares of common stock may be sold, which could
affect the trading prices of our common stock and the convertible notes;
- security breaches or system failures could disrupt our business and we
could be liable for some types of failures; and
- if we lose a material client, our business may be adversely impacted.
OVERVIEW
We are a leading application service provider for Internet banking, bill
payment and e-financial services to financial institutions. We provide our
clients a cost-effective outsourced service, branded in their name, by
seamlessly integrating Internet banking, electronic bill payment, and other
e-financial services into a single-vendor, end-to-end solution. As part of our
services, we provide customer support through our call center, marketing
services, web site design, implementation and other services.
We primarily derive revenue from long-term service contracts with our
financial institution clients, who pay us recurring fees based primarily on
the number of their retail customers enrolled and transaction volumes, as well
as an up-front implementation fee. Our financial institution clients typically
subsidize some or all of our fees when reselling our services to their retail
customers, as they derive significant potential benefits including account
retention, delivery and paper cost savings, account consolidation and
cross-selling of other products. As a network-based service provider, we have
made substantial up-front investments in infrastructure. We believe our
financial performance and operating leverage will be based primarily on
increasing retail customer subscriptions and transaction volumes over a
relatively fixed cost base.
Our current sources of revenue are from service fees, implementation and
other revenues. We expect that our revenue growth will principally come from
service fees as a result of continued growth of retail customers.
- Service fees. Our service fee revenues are derived from recurring monthly
fees by providing services which include banking and bill payment,
customer service, consumer marketing, information reporting, and
administrative services, to financial institution clients, typically
based on the number of enrolled retail customers. These services are
priced on a monthly per retail customer basis, and in some cases, on a
transaction basis. We recognize these revenues from services as
provided.
- Implementation and other revenues. We generate revenue from
implementation of our fully integrated services to our financial
institution clients. Implementation fees are paid on a one-time basis
at signing. We previously recognized nonrefundable implementation fees
as revenue under the percentage of completion method as certain
milestone output measures were completed. During the year ended
December 31, 2000, effective January 1, 2000, we adopted SEC Staff
Accounting Bulletin No. 101--Revenue Recognition in Financial
Statements ("SAB 101") and changed our method of accounting for
nonrefundable implementation fees for all contracts to recognize such
fees over the contract term as the services are provided, which
typically range from one to five years. We also derive revenue from
sales of related enabling products and software at fixed prices,
including our PC software and customer service software. These have
not been a significant source of revenue and continue to decline as
retail customers migrate to the web service. Effective January 1,
2001, we discontinued support of our proprietary PC software and
screen-based telephone.
Historically, the majority of our resources have been directed to creating
our proprietary system. Our proprietary system enables us to provide a broad
range of services to our financial institution clients including online
banking, bill paying, and access to complementary financial services supported
by our customer call center, marketing services and other support services.
While investment to date has been significant, we believe the infrastructure
we have built will enable us to support our anticipated growth over the next
several years with only modest cost increases associated with adding retail
customers.
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FINANCIAL CONDITION
Since our founding, we have incurred high costs to create our
infrastructure, while generating low revenues. As a result, we have
historically experienced large operating losses and negative cash flow. At
March 31, 2001, we had an accumulated deficit of $78.8 million and net
property and equipment of $6.7 million. We have funded our operations
primarily through the issuance of equity and debt securities. Ongoing working
capital requirements will primarily consist of personnel costs related to
enhancing and maintaining our system. We expect to continue to incur losses in
the near future.
As of March 31, 2001, we had $3.1 million in cash and cash
equivalents and $14.2 million in investments as compared to $1.8 million in
cash and cash equivalents and $19.7 million in investments as of December 31,
2000. The decrease in cash and investments results from cash used for
operating purposes. Total liabilities decreased from $25.9 million as of
December 31, 2000 to $25.6 million as of March 31, 2001 primarily as a result
of decreases in deferred revenues and capital lease obligations.
Our limited operating history makes it difficult to evaluate our
prospects for success and our revenue and profitability potential is unproven.
RESULTS OF OPERATIONS
The following table presents certain items derived from our statements of
operations expressed as a percentage of revenue.
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
Statement of Operations Data:
Revenues:
Service fees 88.6% 77.3%
Implementation and other
revenues 11.4 22.7
----- ------
Total revenues 100.0 100.0
Expenses:
Cost of revenues 65.6 99.9
----- ------
Gross margin 34.4 0.1
General and administrative 31.4 55.4
Sales and marketing 27.2 75.6
Systems and development 27.0 47.6
Non-recurring charges 3.7 -
----- ------
Total expenses 89.3 178.6
----- ------
Loss from operations (54.9) (178.5)
Other income (expense) (5.5) 9.1
Cumulative effect of change in
accounting principle - (7.2)
----- ------
Net loss (60.4)% (176.6)%
===== ======
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000.
Revenues. We derive revenues from service fees, implementation and
other revenues. Revenues increased $2.6 million, or 85.5%, to $5.6 million for
the three months ended March 31, 2001 as compared to $3.0 million for the same
period in 2000. This increase was primarily attributable to a 112.8% increase
in service fees which were largely recurring and driven by an increase of
138.0% in the number of retail customers and an increase of 123.1% in the
number of transactions offset by lower service fees per user measured at March
31, 2001 and March 31, 2000. Additionally, implementation and other revenues
decreased $48,000, or 7.1%, to $634,000 as a result of discontinuing our
screen phone and proprietary PC software products.
Cost of Revenues. Cost of revenues primarily includes telecommunications,
payment processing, systems operations, customer service, implementation and
related products. Cost of revenues increased $653,000, or 21.8%, to $3.6
million for the three months ended March 31, 2001 as compared to $3.0 million
for the same period in 2000. This increase was primarily attributable to a
$289,000 increase in customer service costs and a $231,000 increase in bill
payment processing costs. These increases resulted from the increased number
of retail customers, increased number of transactions, increased banking
expenses and an increase in staff to support the growth of our operations.
Gross Profit. Gross profit increased to $1.9 million from $4,000 for the
three months ended March 31, 2001 and 2000, respectively. Gross margin
improved to 34.4% from 0.1% primarily due to increased service fees leveraged
over our relatively fixed costs of revenue. Gross margin for service fees
improved as a result of increased end user growth without a corresponding
incremental increase in costs.
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General and Administrative. General and administrative expenses primarily
consist of salaries for executive, administrative and financial control
personnel, consulting expenses and facilities costs such as office leases,
insurance, and depreciation. General and administrative expenses increased
$83,000, or 5.0%, to $1,745,000 as compared to $1,662,000 for the three months
ended March 31, 2001 and 2000, respectively. We have employed cost control
initiatives to minimize material increase in our general and administrative
expenses.
Sales and Marketing. Sales and marketing expenses include salaries and
commissions paid to sales and marketing personnel, consumer marketing costs,
public relations costs, and other costs incurred in marketing our services and
products. Sales and marketing expenses decreased $756,000, or 33.3%, to $1.5
million for the three months ended March 31, 2001 as compared to $2.3 million
for the same period in 2000. The principal reason for the decrease in sales and
marketing expenses was a decline in advertising, direct mail, commission,
telemarketing expenses and a reduction in staffs as a result of consolidating
certain client service responsibilities.
Systems and Development. Systems and development expenses include salaries
of personnel in the systems and development department, consulting fees and
all other expenses incurred in supporting the research and development of new
services and products, and new technology to enhance existing products.
Systems and development expenses increased $75,000, or 5.3%, to $1.5 million
for the three months ended March 31, 2001 as compared to $1.4 million for the
same period in 2000. The lack of material increase in our systems and
development expenses was associated with our efforts to control costs.
Non-Recurring Charges. As a result of the reduction in staffs by
approximately 9% on January 3, 2001, we incurred a one-time charge of
$209,000, of which $207,648 was paid, including severance costs and benefit
payments as of March 31, 2001.
Loss from Operations. Loss from operations decreased $2.3 million, or
43.0%, to $3.1 million as compared to $5.4 million for the three months ended
March 31, 2001 and 2000, respectively. Excluding one-time charges related to
the staff reduction, loss from operations decreased $2.5 million, or 46.9%,
attributable to the various factors as described above.
Other Income and Expense. Interest income decreased $96,000, or 31.9%, to
$205,000 for the three months ended March 31, 2001 as compared to $301,000 for
the same period in 2000, primarily due to lower interest rates. Interest and
other expenses increased $485,000, or 1691.5%, to $514,000 for the three
months ended March 31, 2001 as compared to $28,700 for the same period in 2000
as the result of the interest expense in connection with the issuance of $20
million convertible subordinated notes on September 28, 2000. Going forward,
until at least September 2005, unless the convertible notes are earlier
converted, we will incur higher interest expenses due to the convertible
subordinated notes.
Net Loss and Loss Per Share. Net loss was $3.4 million compared to a loss
of $5.3 million for the three months ended March 31, 2001 and 2000,
respectively. For the three months ended March 31, 2001 and 2000 the basic and
diluted loss per share were $(0.29) and $(0.48), respectively. Excluding
non-recurring charges and cumulative effect of change in accounting principle,
we would have reported loss per share of $(0.27) and $(0.46), for the three
months ended March 31, 2001 and 2000, respectively, as a result of the various
factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and investments in available for sale securities increased $108,000
to $17.3 million from $17.2 million as of March 31, 2001 and 2000,
respectively.
Net cash used in operating activities was $3.7 million for the three
months ended March 31, 2001 as compared to $4.8 million in the three months
ended March 31, 2000. Cash used in operating activities in the three months
ended March 31, 2001 resulted primarily from a net loss of $3.4 million. Cash
used in operating activities in the three months ended March 31, 2000 was
primarily attributable to a net loss of $5.3 million.
Net cash provided from investing activities in the three months ended
March 31, 2001 and 2000 was $4.9 million and $4.8 million, respectively, which
primarily resulted from the net reduction of $5.6 million and $5.5 million of
investments in available for sale securities. In addition, capital
expenditures were $676,000 and $737,000 for the three months ended March 31,
2001 and 2000, respectively.
Net cash provided by financing activities was $82,000 in the three months
ended March 31, 2001 as compared to $1.3 million in
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the three months ended March 31, 2000. Cash provided by financing activities
in the three months ended March 31, 2001 resulted primarily from the issuance
of $222,000 of common stock attributable to the exercise of warrants and
the employee stock purchase plan offset by $94,000 of the capital lease payments
and $45,000 of the convertible subordinated notes issuance costs. During the
three months ended March 31, 2000 $1.3 million in cash provided by financing
activities was the result of the issuance of common stock in the amount of $1.1
million. At March 31, 2001, we had cash and cash equivalents of $3.1 million,
investments in available for sale securities of $14.2 million, working capital
of $17.8 million, long term obligations of $21.2 million and stockholder equity
of $6.1 million.
We currently believe that cash, cash equivalents and investment balances
will be sufficient to meet our current anticipated cash requirements for at
least the next twelve months. However, there can be no assurance that
additional capital beyond the amounts currently forecasted by us will not be
required or that any such required additional capital will be available on
reasonable terms, if at all, at such time as required. We intend to invest our
cash in excess of current operating requirements in marketable government,
Corporate and mortgage-backed securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest primarily in marketable government, corporate, and
mortgage-backed debt securities. We do not have operations subject to risks of
foreign currency fluctuations, nor do we use derivative financial instruments
in our operations or investment portfolio. We have classified all of our
investments as available-for-sale financial instruments. The following table
provides information about our available-for-sale investments that are
sensitive to changes in interest rates.
MARCH 31, 2001
-----------------------------------------------
BOOK VALUE FAIR VALUE INTEREST RATE
------------ -------------- ---------------
U.S. government treasury
obligations................... $ 688,683 $ 688,541 4.15%
Commercial bonds................ 13,392,835 13,476,188 5.06%
----------- ------------
Total investments..... $14,081,518 $ 14,164,729
=========== ============
The long-term debts on March 31, 2001 are comprised of convertible
subordinated notes with an 8% interest rate and capital lease obligations with
interest rates ranging from 8% to 13%. The cost of the convertible
subordinated notes is approximately fair market value at March 31, 2001. We do
not believe a fluctuation of 100 basis points in the prime rate would have
a material adverse effect on us.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any pending material litigation nor are we
aware of any pending or threatened litigation that would have a material
adverse effect on the Company, our business or results of operation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2001, we issued
21,385 shares of common stock upon an exercise of outstanding warrants and
received proceeds of $150,000. We relied upon Section 4 (2) of the
Securities Act of 1933, as amended, to issue these shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
(A) Exhibits
Not applicable.
(B) Reports on Form 8-K
On February 9, 2001, Registrant filed a current report on Form 8-K
disclosing that, on January 17, 2001, the Registrant publicly disseminated a
press release unveiling a five-point initiative to accelerate its path to
profitability, announcing its outlook and reporting its adoption of Staff
Accounting Bulletin 101.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONLINE RESOURCES CORPORATION
Date: May 15, 2001 By: /s/ Matthew P. Lawlor
------------------ -------------------------
Matthew P. Lawlor
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2001 By: /s/ Carl D. Blandino
------------------ ------------------------
Carl D. Blandino
Chief Financial Officer and Executive Vice President
(Principal Financial Officer)
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